Cookies

This website uses cookies to give you the best possible experience. By continuing to use our website you are giving consent to cookies being used. For more information about cookies and how to disable them, please read our Privacy and Cookie policy.

What keeps me awake at night

Share

We all have things that keep us up nights. For me, it used to be a cat that would regularly clamber on my face at the witching hour. I got rid of the cat – callous*, I know, but it does show that I’m not afraid to cut something that isn’t working.

Still, my sleep has been troubled again lately; this time sterling is the culprit.

Even before last year’s referendum we believed that the pound would become a Brexit barometer. And this is most definitely the way it’s gone. After the leave vote, sterling fell more than 15% against a basket of major currencies. We benefited handsomely from that – as did many other UK investors with substantial foreign assets (and the FTSE 100, with its predominantly oversea earnings). It has since remained in that lower trading range, stoking inflation and giving manufacturers a discount on their wage bill. It broadly ticks higher on conciliatory Brexit news and falls on evidence of cross-Channel antagonism.

Recently, sterling has become a much harder game to play. We think that, on a long-term view, sterling is significantly undervalued. But a lot can happen in the shorter term: unclear and shifting political stances are vying against changeable UK monetary policy; a strengthening Continental economy is clashing with greater political uncertainty in the EU; and unclear US fiscal spending is making it difficult to determine the likely path of US interest rates.

In short, currency markets are more capricious than a cat with a vendetta. And that’s before you account for the – unlikely, but rising – risk of a second referendum on Brexit. Such a vote would play havoc with sterling forecasts.

As the Brexit negotiations have dragged on with little evidence of progress, there have been increasing murmurs about holding another referendum to gauge whether the public is really happy with the path ahead. In my mind, the chance of a second vote has jumped from 10% to 40%. It seems to me that, if a vote were called today, there’s a strong chance that remain would carry the day. That would lead to a rally in sterling, in my view, as the Brexit discount is unwound.

Meanwhile, the UK public finances are straining under lower growth and labour productivity that’s even worse than first thought. The November Budget is looking like another austere affair, which may anger poorer sections of society and the public sector. We may start to see more strikes popping up in the coming months, at a time of dampened economic growth, which could hurt foreign investors’ appetite.

And then there’s the Bank of England. It has to adapt to fiscal policy, but with inflation well above target and growth slowing, it’s backed itself into a corner. Raising rates too quickly could bring on recession and another slump in sterling that would send inflation higher again: stagflation. Still, not intervening may lead to further sterling weakness and make inflation even worse.

All this matters to us when managing our funds currency fluctuations can ruin lots of painstaking work that goes into buying the right equities, bonds and funds. At the moment we have reduced our exposure to the UK economy and sterling earnings considerably, so a snap back in the pound is a material risk to our portfolio. We have hedged most of our sterling assets so we are partially protected if the pound falls, but we would miss out on gains if it rises.

That’s why I’m pondering the pound at night instead of sleeping: sterling is so potentially volatile in either direction.

Unfortunately, we’re stuck with sterling so I’ll just have to deal with less sleep till we get more clarity.

*Ozzy the Cat went to a happy home where he’s pampered by a colleague’s teenage daughter, so no animals were harmed in the making of this blog.

Share

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.